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Family-run Publix is both the largest employee-owned company and the most profitable grocer in America. Those two facts are linked, and they might be the formula for fending off Bentonville's retail behemoth.

Passing through Publix's sliding doors to escape the blistering Lakeland, Fla. heat is a welcome relief, but it isn't just the air-conditioning that jumps out at you. As you walk the aisles, bag boys and clerks in sage-green shirts and black aprons routinely smile and ask questions: "How are you today? Can we help you with anything?"

When a middle-aged woman asks about a box of crackers, no aisle number is blurted out. Instead, an employee races off to find the item, just as he is trained to do. At checkout, shoppers move to the front quickly, thanks to a two-customer-per-line goal enforced by proprietary, predictive staffing software. Baggers, a foggy memory at most large supermarket chains, carry purchases to the parking lot. Even Publix's president, Todd Jones, who started out as a bagger 33 years ago, stoops down to pick up specks of trash on the store floor.

"We believe that there are three ways to differentiate: service, quality and price," Jones says. "You've got to be good at two of them, and the best at one. We make service our number one, then quality and then price."

If that's a dig at Wal-Mart--traditional slogan: "Always low prices"--which has recently targeted Publix's home turf, Florida, it's a subtle one. The more direct retort comes via the numbers. As best we can tell, Publix is the most profitable grocery chain in the nation: Its net margins, 5.6% in 2012, trounced Wal-Mart's (3.8%), as well as those of every public competitor, ranging from mass market Kroger (1.6%) to hoity-toity Whole Foods (3.9%).

Those numbers in a field notorious for razor-thin margins stem from another heady fact: Publix, the seventh-largest private company in the U.S. ($27.5 billion in sales) and one of the least understood thanks to decades of media reticence, is also the largest employee-owned company in America. For 83 years Publix has thrived by delivering top-rated service to its shoppers by turning thousands of its cashiers, baggers, butchers and bakers into the company's largest collective shareholders. All staffers who have put in 1,000 work hours and a year of employment receive an additional 8.5% of their total pay in the form of Publix stock. (Though private, the board sets the stock price every quarter based on an independent valuation; it's pegged at $26.90 now, up nearly 20% already this year.) How rich can employees get? According to Publix, a store manager who has worked at the company for 20 years and earns between $100,000 and $130,000 likely has $300,000 in stock and has received another $30,000 in dividends.

The route to that payday is completely transparent. Publix almost exclusively promotes from within, and every store displays advancement charts showing the path each employee can take to become a manager. Fifty-eight thousand of the company's 159,000 employees have officially registered their interest in advancement. Associates are encouraged to rotate through various divisions, from grocery to real estate to distribution, to get a broad sense of the business. A former cake decorator in a store bakery is now in charge of all strategy for its bakeries. A distribution-center manager overseeing 800 associates got his start unloading railcars. When Lakeland store manager Edd Dean started bagging groceries as a teenager, he never expected to still be working in a supermarket 30 years later. "When I graduated college I had been seven years at Publix, and I started looking for a 'real job,'" he says. "I interviewed at a lot of companies, but the manager I was working with kept hounding me to come to Publix. Eventually it just clicked." Dean is one of 34,000 employees who have more than ten years of tenure.

"I'm always amazed that more companies don't recognize the power of associate ownership," says Publix CEO Ed Crenshaw, 62, the grandson of founder George Jenkins and the fourth family member to run the company. While Crenshaw has a 1.1% stake in Publix, worth $230 million, and his entire family has 20%, worth $4.2 billion, the employees (and former employees) are the controlling shareholders, with an 80% stake, worth $16.6 billion. Not surprisingly none of them belongs to a union.

Publix has effectively developed a hammerlock in the lucrative Florida market, where its 755 stores (out of 1,073 total) more than double any rival's. "They have blanketed the state so thoroughly that it has made it difficult for anyone else to make inroads," says Mark Hamstra, editor of Supermarket News.

That's now changing. The formidable Wal-Mart is targeting Florida after saturating every other market in the South; it now has 239 locations with grocery departments in the state. Kroger, the nation's second-largest retailer, with $97 billion in sales, bought upscale grocer Harris Teeter in July, picking up its first store in Florida since pulling out in 1988. It also competes directly with Publix in the Atlanta area--and soon will be with its slew of locations in North Carolina, which Publix plans to enter next year. German discount retailer Aldi has also moved into Florida.

Yet Crenshaw remains unfazed--he has faith in his employees and his complex compensation system that, in addition to ubiquitous ownership, grants shares of a store-specific bonus pool every 13 weeks. The exact amount varies, but typically 20% of quarterly profits go into that larger pool; 20% of the pool is then paid out in cash to the store's employees. "When competition opens up across the street and our sales are impacted, they're impacted," he says. "So they're incented to make sure they're doing everything they can to serve that customer to the best of their ability."

THE TRADITION OF employee ownership dates back to Crenshaw's grandfather, whose office at Publix's old headquarters is being restored to its wood-paneled 1960s glory for historical tours. ("It's our Graceland," says one assistant store manager.) As the story goes, George Jenkins had been the manager of a successful Piggly Wiggly market in Winter Haven, Fla. but quit at the start of the Great Depression when the new corporate owner, based in Atlanta, refused to grant even five minutes of face time despite Jenkins' driving eight hours to see him. While forced to wait outside the office, Jenkins supposedly overheard his new boss talking about golf, so he resolved to quit and start a rival store in Winter Haven. From the outset he gave shares in the company to early employees in an effort to win their loyalty.

Jenkins' big gamble came a decade later. He closed his two stores, borrowed against an orange grove he owned and opened a state-of-the-art supermarket with then new amenities like air-conditioning, wide aisles, automatic doors, fluorescent lighting and a water fountain. People mocked him for pouring money into unnecessary details. But customers loved the in-store comforts, especially the relief from the sweltering Florida sun, and thanked him by spending more on average than they had previously.

One of Publix's new billboards.

When Mr. George, as he was known, stepped down in 1989 after 59 years, the company had a stellar reputation and $5.3 billion in sales from 367 stores, all in Florida.

His departure led to some soul-searching and ushered in a new, hypercompetitive Publix. By then Wal-Mart was already beginning its advance into the grocery business. Jenkins' son Howard, who took over as CEO, knew that he had to plot an ambitious course to survive. "We knew how Wal-Mart was getting special deals from manufacturers, and in order to compete we had to increase our buying power," he says. That meant bulking up and venturing outside the state for the first time ever. He vowed to quintuple sales to $25 billion. One of the first targets was the Atlanta area, which Publix infiltrated in 1991 (led by Crenshaw as vice president).

While there were doubters who felt the local Florida chain would not be able to compete with mature national players, Publix had a plan: Overwhelm new customers with a full-service experience. Publix stores at the time had an average of 250 employees, but those early Atlanta locations hired 400. An incredulous newspaper reporter at an Atlanta store opening in March 1993 joked that, from greeters at the door to helpers in the aisle and baggers pushing customer carts out to the parking lot, it seemed like all 400 were working at the same time. Today the company operates 318 stores across Georgia, Alabama, South Carolina and Tennessee, just under 30% of its total stores.

Meanwhile, it ably defended its home turf. In 2005 Publix's longtime competitor Winn-Dixie filed Chapter 11, pressured by Publix from the higher-end and discount retailers at the bottom (it has since reorganized and still operates about 480 stores in the South). Albertsons has pulled out of all but four Florida locations.

Even as Publix's same-store sales increased only 2.7% on average over the last ten years, the company has aggressively worked to boost its industry-leading margins. In 2007 Publix launched a prescription-drug program for customers that now offers free 14-day supplies of six generic antibiotics and 30-day supplies for hypertension and diabetes medicine. The loss leader has helped the pharmacy (now in almost 90% of Publix's locations) become the company's fastest-growing department. Also that year it experimented with a Whole Foods-esque format called GreenWise Market to capture some of the booming business in natural and organic foods. The format didn't take as a stand-alone store, but the GreenWise organic brand, along with Publix's private label, is a winner, with higher margins on average and stronger sales, up a combined 6% in 2012 (more than triple overall sales growth). The company's net profit margins over the past ten years have gone from 3.9% to the gaudy 5.6% figure.

Publix's newest innovation is its Aprons Cooking School, now in eight supermarkets. Catering to 21st-century parents looking to fit scratch cooking into their lifestyles, the Aprons chefs teach classes such as Grilling Fish 101 and A Vegetarian's Journey Through India--all using ingredients found in the store, of course. While the chain still lacks the wow factor of the larger upscale produce and prepared-food sections at Whole Foods and Wegmans, Neil Stern, retail analyst at McMillan Doolittle, says Publix delivers "operational wow" instead, leaning hard on clean, well-organized and well-stocked stores run by that exceedingly helpful, motivated staff.

WHILE THIS FORMULA proved too much for Winn-Dixie and Albertsons, Wal-Mart's encroachment is a far greater challenge. Arkansas' retail giant has become the nation's largest supermarket chain, with 3,500 stores, including Supercenters and Neighborhood Markets, which extend the Wal-Mart brand of cost-cutting to grocery items. Wal-Mart's current store total in Florida is merely a beachhead.

To flex its muscles in markets currently dominated by Publix, Wal-Mart last year began airing commercials that depict local moms shaving dollars off their grocery bill by shopping at Wal-Mart. A concurrent newspaper campaign puts receipts from the two stores side-by-side, with one ad in Miami displaying a 16% savings over Publix. Wal-Mart claims the ads are driving a 1% increase in a combined metric of foot traffic and sales. "We're not surprised that the competition doesn't like it when we tell customers to compare prices and see for themselves, but we think consumers deserve every chance to find value," a Wal-Mart spokesman says of the ad campaign, which has infuriated Publix executives. "We won't apologize for offering low prices or telling customers to compare prices for themselves."

True to its history, Publix is countering with its own head-to-head marketing blitz, touting a buy one, get one free program available on at least 40 items a week that allows it to discount without eviscerating any product's core price. "People say you shouldn't poke the bear," Jones says. "I say, 'Why not? Let's poke the bear.' "

Still, Publix is realistic about the comparison. "You can't have the lowest price and do what we do," says Crenshaw. "So we don't tell our customers that we have the lowest price. What we do is say, 'Wal-Mart doesn't always have the lowest price.' Shop with us and we'll show you value on your entire basket. Some items will be lower in price, but in addition to that you're going to get trained, knowledgeable people that care about you as a customer in a clean, safe environment."

It's a fine distinction to rest an advertising campaign on but also a unique value proposition: In an age when Amazon's fast shipping counts as great customer service, Publix wants you to pay for a personal touch in your supermarket. In return it'll do its best to keep prices competitive and funnel your spending back to the employees who do all the work.

Based on recent results--sales were up 6% in the last quarter and net earnings rose 15%--that people-first formula Publix inherited from George Jenkins is working. Not that Crenshaw is surprised. "Too many companies are subjected to the stock market and analyst calls, and it's all about what we can do to make sure this quarter we're projecting this and meeting this," he says. "We're in this business for the long haul--83 years so far."